Chapter 16: Health Care Reform

1. Chapter 16: Health Care Reform Hospital Fees Hit the Middle Class Hard: Present System Favors the Rich and Poor – Medical Men Suggest Ways to Lower the Cost of Illness – The New York Times

2. Problems with Current System • High Costs – over 13 percent of GDP. • High percentage of population without health insurance – about 14.6 percent. • Proper Access to Care for those covered by Medicaid. • Practices such as Cream-skimming.

3. Comparison of G-8 Countries, 1999 Note that all but the US have universal or near universal health insurance coverage, single-payer systems, and a much greater role for government.

4. How Much Does the Government Spend on Health Care in the US? • According to data published by the Centers for Medicare and Medicaid Services (CMS), government, at all levels, has been responsible for paying for roughly 40 to 45 percent of all health care over the last three decades (http://cms.hhs.gov/statistics/nhe/default.asp). • Relative to government, this figure suggests that the private sector has continued to exert greater control over the health care purse strings. • Woolhandler and Himmelstein (2002), however, scrutinize the method CMS uses to measure government spending in the national health accounts and show that government has much more control over health care spending than the private sector does in the US. • Steffie Woolhandler and David Himmelstein are both professors at Harvard Medical School, primary care physicians, and founders of Physicians for a National Health Program, a nationwide group with more than 9,000 members (visit http://www.pnhp.org).

5. Government Spending on Health Care - continued • Woolhandler and Himmelstein explain that CMS includes only direct purchasing of medical care for programs such as Medicare, Medicaid, and government-owned hospitals in its measure of government spending. • Consequently, public employee benefits, such as the Federal Employees Health Benefits Program, are missing from the reported figure by CMS because although the government supports these public programs with tax-financing, private insurers are responsible for writing the actual check because they administer the program on behalf of the government. • In addition, Woolhandler and Himmelstein point out that health insurance premiums are exempted from various types of federal, state, and city taxes so implicitly government also pays for this portion of health care by granting these tax preferences.

6. Government Spending on Health Care - continued • To get a better idea about tax-financing of health care, the authors add the direct purchasing of medical care by government, expenditures on public employee health benefits that are tax-financed but administered by the private sector, and the value of the health insurance premium tax preference. • In 1999, they showed that direct spending of government equaled 45 percent of all health care spending. Public employees benefits accounted for another 5.4 percent and the tax subsidy for health insurance premiums amounted to another 9.1 percent. • Thus government, at all levels, was responsible for financing nearly 60 percent of all health care costs in the US, indicating that tax-financing accounts for the largest source of health care funds.

7. Government Spending on Health Care - continued • On a per capita basis, their estimates for 1999 revealed that the US government spends more on health care than Switzerland, Canada, Germany, France, Australia, Italy, Japan, Sweden, and the UK. These are countries where government traditionally has played a much greater role in the financing and reimbursing of health care. • Of course the much higher overall health care spending in the US provides part of the explanation for the greater per capita spending figure by the government. • These estimates are certainly provocative because they show that tax-financing represents the major source of funds for health care in the United States. Indeed, tax-financing accounts for an even greater share of health care costs considering that not-for-profit health care organizations such as hospitals and nursing homes are also granted tax preferences.

8. Federal Employees Health Benefits Program • Did you ever wonder which physician attends to your doctor when she feels ill? Or consider to which clinic your dentist goes when he requires dental care? Or speculate about who provides health insurance coverage to those federal employees overseeing the operation of the Medicare and Medicaid programs in the U.S? • Let’s examine the latter speculation.

9. FEHPB - continued • Active federal employees, such as those working in the Center for Medicare and Medicaid Services, receive their health insurance through the Federal Employees Health Benefits Program (FEHBP). • The FEHBP is the largest employment-based health benefit plan in the nation, covering over 9 million people, including in addition to active employees, retired federal employees, dependents of active and retired federal employees, and members of the U.S. Congress. • The total cost of the program amounted to $20 billion in 2000 and the Office of Personnel Management, a federal agency, runs the FEHBP.

10. FEHBP - continued • In 2003, the FEHMP offers enrollees tremendous choice among 188 different plans. The idea is that choice promotes competition among health insurers, which helps to contain costs and spur innovations. • Choices include national and regional traditional fee for service, PPO, HMO, and POS plans. All enrollees have at least a dozen fee-for-service options in addition to local HMOs. The federal government pays 75 percent of the plan’s premium up to a maximum of 72 percent of the enrollment weighted average of all premiums. • The subscriber is responsible for paying any remaining amount above the subsidy cap. Creating consumer cost consciousness is the motivation behind the subsidy cap. • To help federal employees make informed decisions, the FEHBP and other organizations distribute information about the various health plans including consumer satisfaction surveys.

11. FEHBP - continued • The FEHBP has been fairly successful at controlling health insurance premiums. For example, over the period 1992 to 1999, premiums of regional FEHBP plans increased by an annual average of 3.3 percent compared to a 5 percent increase for all private health insurance plans. • As another point of comparison, the FEHBP premium increase compared very favorably to the average increase of premiums for CALPERS, the California Public Employees Retirement System, which amounted to 2.8 percent over the same 7-year period. • Moreover, in 2003, premiums of FEHPB plans increased by 11.1 percent significantly less than the 20 to 25 percent premium increase for CALPER plans. • CALPERS is the nation’s largest public pension fund and provides health insurance to 1.2 million state and local government employees and their families in California.

12. FEHBP - continued • Many have pointed to the FEHBP as a model for reforming Medicare and a mechanism to expand health insurance coverage. • For example, when running for president, Senator Bill Bradley proposed that uninsured individuals should be given income-related vouchers to enroll in the FEHBP. • Researchers and policy analysts continue to discuss the merits of broadening enrollment in the FEHBP.

13. Proposals for Health Care Reform

14. MEDICAL SAVINGS ACCOUNTS • Takes a market-oriented approach. • Develops tax-free accounts to pay for medical care expenses. • Part of funds put towards a high deductible, catastrophic plan and part towards routine medical care. • Fund allocation for routine care earns interest and can be rolled over into future years, or used to buy into health plan. • Each family makes the choice based on price, income, health status, degree of risk aversion and other factors.

15. MSAs - continued • Does not call for universal coverage but gives freedom of choice. • Because contributions to the MSA are tax deductible up to a preset limit, the price of health care is reduced, making it more affordable. • Risk-adjusted tax credits might also be made available for poorer households • Unused portion of the MSA continues to grow and could replace Medicare and/or used for financing long-term care. • Cost containment is achieved through price consciousness and elimination of many small claims

16. Criticism of MSAs • Consumers are not sufficiently informed to make price conscious decisions. • Consumers will forgo necessary or preventive care to save money. • Lead to adverse selection • Deductible insufficient to control health care costs • Plan is regressive

17. Responses to Criticisms • Demand studies show that consumers are conscious of health care prices, even very small out-of-pocket prices. MSAs will create an incentive for consumers to become even more informed. • Point to success of MSAs already in use. • Present system is more regressive than MSAs.

18. MSAs – The Case of Singapore • The pressure to contain rising health care costs has brought a considerable amount of attention to Singapore’s health care system because it relies on medical savings accounts. • Current figures indicate that Singapore spends between 3 and 4 percent of GDP on health care and that is a far cry from the 13 percent of GDP the United States currently allocates to health care. • Some attribute the ability of Singapore to tame health care spending on the cost containment incentives that comes into play with medical savings accounts.

19. MSAs in Singapore - continued • Singapore health care system is composed of three basic arrangements. • The Medisave program is a compulsory savings plan that forms the basis for the individual medical savings accounts. The contribution rates range from 6 to 8 percent of monthly income and are shared between employee and employer. Self-employed individuals must pay the entire amount and caps are placed on monthly contributions which prohibit more affluent individuals from accumulating unreasonably high savings balances. • Medisave accounts are used primarily to finance inpatient hospital care and strict payment schedules are in place to protect the accounts from being depleted too rapidly.

20. MSAs in Singapore - continued • To protect individuals from the financial burden of a major illness, a catastrophic illness insurance plan, called MediShield, is available. • This insurance plan is optional and pays for 80 percent of hospital expenses after a rather substantial deductible has been met. • The third institutional component of the Singapore health care system is the Medifund, which is an endowment established by the government to finance the health care needs of the poor.

21. MSAs in Singapore - continued • Barr (2001) contends that the ability of the Singapore health care system to contain costs can only partially be explained by the implementation of medical savings accounts. • Strict government controls on inputs and prices along with the rationing of medical care have played an even greater role in controlling costs. • Other explanations include a relatively young population and the existence of a number of traditional Chinese medical practitioners that are not funded under the government sponsored health care programs. Michael D. Barr. “Medical Savings Accounts in Singapore.” Journal of Health Politics, Policy and Law. 26(August, 2001). pp. 709-726.

22. INDIVIDUAL MANDATES • Like MSAs, places the responsibility for insurance on the individual but not coverage is mandated. • Individuals are required by law to purchase a basic medical insurance plan as defined by the federal government but individuals are not precluded from purchasing more comprehensive coverage or prevents employers from sponsoring the coverage. • Universal coverage is achieved through a combination of the mandated coverage and the government’s guarantee of a “fall back” plan.

23. Individual Mandates - continued • Risk adjusted tax credits and vouchers are offered for those with insufficient income. The Medicaid and Medicare programs are eventually phased out. • Fall back plans are created through competitive bidding. • Cost containment is achieved through competition which is heightened because federal government plays no direct role. • Critics complain about lack of information, moral hazard problem, and loss of freedom.

24. MANAGED COMPETITION • Basis of Clinton Health Plan. • Builds on existing system of employer-provided medical coverage. • Employers are mandated to provide medical coverage for basic medical services or pay, for example, an 8 percent payroll tax on the first $22,500 of wages for employees not covered. • Self-employed individuals and early retirees must pay for health care coverage with an 8 percent tax on adjusted income up to a preset maximum. The tax is collected through the income tax system.

25. Management Competition - continued • Novelty is the creation across of the country of government buyer organizations called health alliances, that use their purchasing power to negotiate competitive prices for health insurance from private companies. • The alliances also serve as brokers that collect premiums, manage enrollment, and carry out other administrative duties. • Each alliance is supposed to offer a number of competing plans for enrollees.

26. Managed Competition - continued • Universal coverage is achieved through employer mandates and subsidies provided to low-income families. • Employers pay 80% of premiums and consumers pay 20%. Consumer portion creates incentive to reduce the likelihood of excessively generous plans. • Medicaid and Medicare are maintained and eventually take advantage of the alliances. • Cost containment results from the competition among private insurers as they vie for customers through the alliances. All plans must offer a uniform benefit package.

27. Managed Competition - continued • One criticism is that not enough competition will exist in rural areas. • Another is that the alliances will result in “one-size-fits-all” health insurance plans. • The employer mandate will result in unemployment especially among the low income workers.

28. NATIONAL HEALTH INSURANCE • Creation of an insurance system similar to the one presently existing in Canada. • Current multipayer system is replaced by a single-payer public system. Health insurance companies are eliminated. • Universal coverage is guaranteed with first-dollar coverage. Financed through general taxes. • Medicare and Medicaid are ended so funds can be used to support the NHI. Employers pay taxes equal to the current premium contribution.

29. NHI - continued • Cost containment based primarily on the efficiencies associated with using a single payer system and elimination of the costs associated with risk selection, taxes, and profits (administrative costs without benefits). • Health care expenditures are controlled by establishing a link with GDP. • Global budgets for hospitals and fee schedules for physicians are implemented.

30. NHI - continued • Employment effects are felt in the private health insurance market and health care administration. • Critics worry about that government enterprise is monopoly enterprise – little variety and response to consumer demands.

31. Attempts at State Health System Reform

32. Health System Reform in Hawaii: The Case of Employer Mandates • The Prepaid Health Act of 1974 mandates with few exceptions that employers provide health insurance to all employees. • Each medical plan must provide minimum set of benefits and the employee’s premium contribution is limited to 1.5 percent of monthly salary. • The rest of the population covered by the State Health Insurance Program (SHIP) of Hawaii. • SHIP later rolled into QUEST program that was designed to provide health insurance to those individuals with incomes up to 300 percent of the federal poverty level. Premium contributions base on sliding scale. Program provides a standard package and MCOs compete for QUEST contracts.

33. Health System Reform in Hawaii • Unfortunately the uninsured rate in Hawaii increased from 5.8% in 1995 to slightly under 10 % in 2001 for a number of reasons: • High cost of Quest has caused eligibility to be tightened. • Low employment growth • Growing number of employers that provide health insurance to employees but not family members • Only two dominant health insurers

34. Health System Reform in Maryland: The Case of Regulation • In the early 1970s Maryland established an All Payer Hospital Payment System. • In 1994, a Comprehensive Standard Health Benefit Plan was established to provide small to medium size firms with access to health insurance, although employers are not mandated to provide coverage. • Any health insurance company doing business in Maryland must offer a standard plan to all businesses employing 50 or fewer workers. Plans must be community rated except for minor adjustments and no benefit denial allowed for preexisting conditions. • To control costs, premiums can be no greater than 12 percent of the average wage in the state. • About 11.3% uninsured in 2001.

35. Health System Reform in Minnesota: The Case of Regulated Competition • In 1992, Minnesota approved MinnesotaCare that addressed the issues of cost containment and access. • Cost containment plan placed great emphasis on competition along with some degree of regulation. • The competitive aspect focused on integrated service networks (ISNs), which were prepaid health care plans that compete on the basis of price and quality. Competition was made possible by the mandatory disclosure of price and quality information and standardization of health benefits.

36. Health System Reform in Minnesota • Regulatory component called for the state commissioner of health to set a cap on the growth of ISN premiums and control fees of out-of-network providers through an all payer rate setting system. • Other cost controls included targets for health care expenditure growth and CON laws. • Uninsured persons were offered state subsidized coverage based on a sliding fee scale financed by taxes on health care providers and the cigarette tax. • Any company providing health insurance must guarantee coverage regardless of health status and change modified community rated premiums.

37. Health System Reform in Minnesota • In 1995, the Minnesota legislature began to repeal or modify many of the reforms. The legislature repealed the all payer rate setting legislation and curtailed the expansion of MinnesotaCare subsidies to childless households with incomes up to 275 percent of the poverty level. • In 1997, other provisions were also repealed. In particular, the state repealed revenue limits on HCPs and changed the growth limits on health care expenditures to cost containment goals which are now voluntary. • Close to 8 percent of the population uninsured in Minnesota in 2001.

38. Health System Reform in Oregon: The Case of Rationing • Oregon Health Plan in the early 1990s prioritized a list of 740 medical procedures. Each medical procedure was rank based on its ability to improve health, its cost, and perceived community value. For example, treatment for appendicitis was ranked 12th and medical therapy for a stroke was ranked 287th. • Once the legislature determined the level of funding for Medicaid, the Health Services Commission determines the number of medical procedures the state can cover. • In Oct. 2002, the state financed 566 out of 736 illnesses or disorders. For example, any Medicaid recipient in need of a liver transplant because of cancer (ranked 608th) would be denied coverage under the Oregon Plan.

39. Health System Reform in Oregon • Proponents of the Oregon Plan argue that the state is trading off comprehensive coverage for a few to make greater access available to many. • Prior to the plan, the Oregon Medicaid program covered only individuals with incomes at or below 58% of the federal poverty level. With the plan, individuals with income at or below 100% of the FPL and pregnant women with incomes at or below 133% of the FPL are now eligible. • Critics of the system point out the the poor primarily bare the burden of cost containment under the Oregon Plan and that prioritizing is best left to the marketplace. • Effective February 1, 2003, Oregon is implementing 3 new health plans with varying levels of eligibility and consumer costs as a way of expanding health insurance coverage. • In 2001, about 13 percent of all Oregonians were covered by health insurance.